IBM misses revenue targets as China cuts IT spend

IBM, for years a tech-infrastructure provider of choice for large corporations and government agencies, is expanding into higher-margin software and cloud computing services as its hardware business sputters.
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IBM missed revenue expectations for the fourth straight quarter as it grappled with weakening demand for servers and storage in emerging markets such as China.

Shares in the world's largest technology services company fell 3.5 per cent to $US181.68 in after-hours trade.

Chief executive Ginni Rometty and her team will forego their annual incentive payments for 2013 as IBM failed to increase revenue. Particularly in China, the government-owned corporations that IBM relies on for a large chunk of revenue are putting the brakes on IT spending.

China accounts for about 5 per cent of IBM's business, about 40 per cent of which is hardware sales. The country's economy, the world's second largest, is tough to read, executives said. A new government headed by Xi Jinping is spearheading significant structural reforms that are affecting state-owned companies.

"China is going through a very significant economic set of reforms," IBM chief financial officer Martin Schroeder told analysts. "While they have slowed, we don't think that this opportunity has gone away."

"We'll be on a trajectory to growth as we exit 2014 and we're comfortable that we get back to mid-single digits across the growth market regions by the end of the year."

Cloud and spying weigh in

IBM, for years a tech-infrastructure provider of choice for large corporations and government agencies, is expanding into higher-margin software and cloud computing services as its hardware business sputters.

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Revenue in that business, which includes server and storage products, fell for the ninth straight quarter as more companies switched to the cloud from traditional infrastructure.

Sources said IBM and China's Lenovo have revived discussions about a sale of Big Blue's low-end server unit, though executives did not mention that on Tuesday.

Some analysts said a backlash against US government spying in emerging economies contributed to plummeting demand at IBM. Asia-Pacific revenue fell 16 per cent, while that from Brazil, Russia, India and China fell 14 per cent in the quarter.

"Their growth markets were everything but growth," Forrester analyst Andrew Bartels said. "They have had quite a bit of success with sales of hardware in these emerging markets, but these markets are not doing well. They're facing competition in those markets."

IBM forecast that full-year 2014 adjusted profit would beat analysts' expectations and also affirmed its 2015 target for operating earnings of at least $US20 a share. Some analysts said they thought IBM would need to grow non-hardware revenue substantially to hit that mark.

Edward Jones analyst Josh Olson told Reuters the company would need solid performance in software and services to meet its target, since expectations are that hardware will not contribute to profit in 2014.

Revenue falls

"Assuming a normalised tax rate, this doesn't leave a lot of room for error to meet the $US18 EPS target," he said.

Total revenue fell 5 per cent to $US27.7 billion ($31.5 billion) in the fourth quarter ended December 31, missing analysts expectation of $US28.25 billion, according to Thomson Reuters I/B/E/S.

"In view of the company's overall full-year results, my senior team and I have recommended that we forgo our personal annual incentive payments for 2013," Ms Rometty said in a statement. For 2013, her base pay was $US1.5 million and annual incentive payment target was $US4 million.

Revenue from IBM's system and technology unit, which includes servers and storage, fell 26.1 per cent to $US4.26 billion. Revenue from global technology services, its largest business, fell 3.6 per cent to $US9.92 billion.

Software revenue was the only bright spot. It grew 2.8 per cent to $US8.14 billion in the quarter.

IBM and rivals such as Oracle and SAP are racing to meet surging demand for web-based software products, better known as cloud computing.

Moving to the cloud allows businesses to cut costs by ditching bulky servers for network-based software and using remote data centers run by technology companies instead.

The global cloud services market last year grew by almost a fifth to an estimated $US131 billion, according to research firm Gartner. IBM Markets Intelligence estimates the market could be as big as $US200 billion by 2020.

Net income for the fourth quarter rose to $US6.2 billion, or $US5.73 a share, from $US5.8 billion, or $US5.13 per share a year earlier. It got help though from a lower tax rate of 11.2 per cent in the fourth quarter, down 14.3 points from a year ago.

On an adjusted basis, it earned $US6.13 per share, above analysts' estimates of $US5.99 per share.

Before its after-hours decline, the stock closed at $US188.43 on Tuesday on the New York Stock Exchange. It has gained about 2 per cent since it reported third-quarter results in October.